IZA DP No. 9249: Smoking, Drinking, Never Thinking of Tomorrow: Income and Risky Choices amongst Young Adults in the UK
published in: O’Higgins, N. and G. Coppola (eds), Youth unemployment and the crisis: Unemployment, education and health in Europe, Routledge , Abdingdon, 2016
In this paper we look at the relationship between health and income as mediated by “lifestyle” choices; that is, a set of behaviours which are thought to influence health and are generally considered to invoke a substantial degree of free choice. The main underlying assumption is that individuals are co-producers of their own health. We first present a theoretical model in which health affects a consumer's utility through a Health Production Function in which health is the output and consumer goods are the inputs. We then estimate an empirical model of health related choices and outcomes. We find that there are substantial differences between the permanent and transitory income determinants – also in terms of the direction of the effects. Moreover, we find that income effects often differ significantly in size and sometimes sign according to whether the income change was positive or negative. This is attributed to the dependence creating nature of the consumption goods involved (smoking cigarettes and drinking alcohol) and their role as anxiety reducing goods which suggests that the simple theoretical model outlined here – some form of which is usually employed to analyse these issues - is not fully adequate to deal with the type of lifestyle consumption goods considered here. We indicate the lines along which a model needs to be developed in order to take this more fully into account, based on the rational addiction approach originating with Becker.